Archive for June, 2009

The American taxpayer was going to make money on the investments in assets related to Bear Stearns, AIG, Citigroup, Bank of America, ad nauseum, correct?

Is it even possible to track the massive government outlays across the entire economic landscape? Is it further possible to measure the actual cost of the outlays as a percentage of the overall subsidies? Can we navigate this terrain without getting bogged down in the midst of a thicket of government data and statistics? You have come to the right place.

Our trusty financial primer, Subsidyscope (right sidebar here at Sense on Cents) has just released a report, entitled Estimated TARP Subsidy Rate Rises, which links to a report from the Congressional Budget Office highlighting all aspects of the TARP (Troubled Asset Relief Program).

Just as “you can’t tell the players without a program” when attending a sporting event, “you can’t track Uncle Sam without Subsidyscope and Sense on Cents.”

What do we learn? Uncle Sam is still holding some TARP firepower. The TARP was launched as a $699 billion capital commitment. If you recall, the TARP legislation was passed as a vehicle to purchase toxic assets from banks. It has moved a long way away from that.

The TARP now covers 4 initiatives:

1. capital purchase and repayments from financial institutions

2. additional support for large financial institutions

3. financial assistance to automakers and related businesses

4. other actions, such as mortgage modification, TALF subsidies, and purchasing securities backed by Small Business Administration loans.

To be perfectly frank, I think it is very plausible that the actual capital commitments and activities ongoing under the TARP may not have met the pure letter of the initial legislation. That said, in an environment in which so many initiatives are capital constrained, there is no real legislative pushback. When was the last time we worried about the spirit or letter of our laws when we had bigger issues concerning money?? Money is more important than legal precedents, correct? We’ll get into that on another post.

On the numbers front:

Of the $699 billion in total capital, $142 billion has yet to be committed. Of the funds already allocated, Uncle Sam has incurred a total cost of $159 billion. What does that mean?

Recall the number of times that government officials told taxpayers that we would make money on investments in AIG and the like. Well, so far we’ve lost $159 billion dollars across all our TARP investments. The loss is calculated as the difference in funds committed and allocated to securities and the market value of those securities. That loss represents 36% of the funds committed and actually allocated.

Not that anybody in the media or the financial industry would want you to know that.

Sy Syms, a retail maven in the New York market, is known far and wide for coining the slogan, “An Educated Consumer Is Our Best Customer.” Well, that may have worked for Sy in retail but there would be no place for Sy on Wall Street. Why?

An educated customer, whether institutional or retail, is able to more fully understand products, risk, and pricing. In the process, profit margins get squeezed. The Wall Street Journal highlights this point in reporting Plain-Vanilla Financing Could Melt Bank Profits:

The Obama administration’s plan to protect consumers from bad deals on mortgages, credit cards and other financial products is an attempt to take the industry back in time and could put a dent in bank profits.

The plain-vanilla guidelines are part of an ambitious effort by the Obama administration to force banks to offer mortgages and credit cards with simpler standard terms.

“That was a market that used to be pretty strongly anchored on plain-vanilla products,” said Michael Barr, the Treasury Department’s assistant secretary for financial institutions.

The coming guidelines, part of a broader proposed overhaul of the financial-services sector, are likely to start with mortgages and eventually cover credit cards, car loans, payday loans and bank-overdraft programs.

A plain-vanilla credit card, for example, isn’t likely to have a lower introductory “teaser” rate. Card issuers wouldn’t be allowed to “change the rules of the game” on consumers, as in cases where a 0% rate is applied to only part of their balances.

The complex loans of recent years didn’t just confuse consumers. The bankers themselves ultimately misjudged whether customers would repay them. And the resulting credit crunch has forced lenders to drop many of their most risky products.

Fairly self-explanatory why Wall Street has little interest in going down that path. In fact, rest assured that the Wall Street lobbying machine is hard at work right now to water down the Consumer Financial Literacy Program.

If there is no seat for Sy Syms on Wall Street, rest assured they’d roll out the red carpet for George Hull and David Hannum . Who are George and David, you ask? They perpetrated a hoax, known as the The Cardiff Giant, back in the mid 1800s. This hoax led to the coining of a phrase commonly associated with P.T. Barnum, and openly embraced on Wall Street, that is “there’s a sucker born every minute.”

Politics is a dirty business, as is pollution. Mixing the two is a very dirty and potentially explosive proposition. Let’s try to shed some light on this corner of our economic landscape.

For evidence of this ‘dark and dirty’ enterprise, we need look no further than the energy bill recently passed by the House and on its way to the Senate. This legislation, formally known as the Waxman-Markey Climate Bill but commonly referred to as ‘cap and trade,’ was recently highlighted by Bloomberg reporting Big Oil’s Answer to Carbon Law May Be Fuel Imports.

Whenever I assess an industry, I initially think of a few basic factors, including:1. product2. cost of sourcing product3. cost of developing or refining product4. targeted market for product5. potential profit margin6. ability to scale the business (i.e. grow the enterprise)7. barriers to entry for competition

These basic business principles apply to virtually every business enterprise in the world. Any good businessman is always looking to cut costs, increase profit margins, and increase market share.

The goal of cap and trade, minimizing greenhouse gas emissions, is worthy. All other things being equal (our age old economic term, ceteris paribus), who would not be supportive of minimizing these emissions? As we know, though, all other things are NEVER equal. Let’s review our basic business principles. (more…)

If and when your money market fund “breaks the buck,” will you be there to collect the change?

I believe it is increasingly likely that money market funds will “break the buck.” The recent SEC statement put forth by SEC Chair Mary Schapiro, which I highlighted in writing “The Buck Is Beginning to Break”, addresses this topic.

In that post, I specifically referenced my concern for municipal money market funds given the recent launch of a municipal version of an Auction-Rate Security, designated as an x-Tender by Wall Street. I walked you through the processing and packaging of this mystery meat in writing, “The Wall Street ‘Sausage Making’ Process.”

The SEC proposed requiring retail money-market funds to have at least 5% of their assets in cash, U.S. Treasury Securities or securities that are accessible within one day and at least 15% in assets that can be converted to cash within a week. Institutional money-market funds would be required to have at least 10% of assets in instruments that could be converted into cash within one day and at least 30% in securities that could be converted within one week. The rules wouldn’t apply to tax-exempt, municipal money-market funds. (LD’s emphasis)

Why and how is it that newly designed rules for a $3.8 trillion sector of the market can exclude a sector encompassing municipal funds? My antennae went up immediately upon reading that. What is different about municipal money market funds that would exclude them from a set of rules designed to protect investors?

Why doesn’t the WSJ itself pursue this line of questioning in writing the article. How can the industry segregate municipal money market funds?

Municipal finance has been largely dependent on newly defined Build America Bonds which entail an obligation by Uncle Sam. Call me suspicious, but I wonder if the exclusion of municipal money market funds is due to the hoped for salvation of municipal finance via the municipal auction-rate security, x-Tender, otherwise known as Porky Pig here at Sense on Cents.

I will keep my nose to the ground in an attempt to sniff this out. Anybody who can help us determine the nature of this stench, please share. In the meantime, stay away from municipal money market funds.

At first blush, I viewed the text of the Financial Industry Regulatory Authority’s (FINRA’s) 2008 Annual Report as nothing more than standard corporate fare. With the benefit of a few days to ponder FINRA’s delivery, I am actually amazed, although never surprised, by the gall of this regulatory organization. In fact, I can only describe FINRA as displaying a special type of hubris in addressing the fraud encompassing Auction-Rate Securities.

I personally believe it is very important for a financial self-regulatory organization, such as FINRA, to be totally transparent in every regard. Why? Very simply, transparency promotes confidence and FINRA’s position as a financial regulator should begin and end with that goal.

Against that backdrop, FINRA should not directly manage any of their own funds. To do so is an open invitation for conflicts of interest. FINRA’s own investment portfolio, managed by an Investment Committee, generated a negative 26% return in 2008. In April 2009, the FINRA portfolio shifted to a lower volatility approach but in 2008 it continued to have exposure to hedge funds, fund of funds, and private equity. As much as I believe this is a very big deal, it pales in comparison to the major issue I, and others, have with FINRA: their involvement with Auction-Rate Securities. Let’s dive into this part of the report and comment as appropriate.

FINRA sets the table:

Throughout the financial crisis, FINRA has worked closely with other regulators, particularly the Securities and Exchange Commission and the Federal Reserve, to examine firm activities for compliance with FINRA rules and federal securities laws, investigate wrongdoing and, when rules were broken, enforcing those rules.

As well they should. However, Finra obviously did not work too closely with the SEC to detect the fraud ongoing with Bernie Madoff. In fact, Finra’s only reference to the Madoff situation is one sentence highlighting the fact that the current financial regulatory structure does not overlap the efforts overseeing broker-dealers with those of investment advisors.

FINRA continues to make their case in stating:

The instability in the markets, and at a number of financial institutions, heightened investor fears. FINRA helped to allay those fears, and foster confidence, by working to ensure the protection of customer assets at troubled institutions.

How can they make this statement with a straight face knowing that thousands of investors and tens of billions of dollars remain frozen in Auction-Rate Securities? A number of Wall Street institutions continue to collect fees from these securities. Hubris? You think?

FINRA continues:

Vigorous enforcement of rules and regulations is a cornerstone of FINRA’s work to protect investors. In 2008, FINRA focused its efforts in several areas of investor harm—including excessive commissions, unsuitable mutual fund share class recommendations and sales, penny stock sales and auction rate securities recommendations and sales.

The hubris grows.

Let’s move forward. FINRA boldly and specifically addresses the Auction-Rate Securities market. I would have thought FINRA may have ducked this topic given the fact that they had sold $647 million ARS in 2007. The fact that they have willingly ‘opened this can of worms’ leaves them subject to fair and open questions. FINRA puts forth: (more…)

Today Bernie Madoff learns his sentence. With this sentence, just now released as the maximum 150 years, Bernie Madoff learns how he will ‘exist’ for the balance of his ‘life.’ Today does not represent the end of the pursuit of justice in this massive fraud, but truly the beginning.

The victims of the Madoff Ponzi scheme will be lucky to receive a small percentage of the monies invested in this fraud. The money is obviously extremely important to all the victims, but there is much more to justice than that.

For justice to truly be served, all of those who aided and abetted this fraud must also be brought to justice and pay the maximum price. To think that Bernie Madoff managed this scheme by himself is beyond naive. The Wall Street Journal highlights as much in writing, For Victims, Downsized Lives and Many Shattered Dreams:

“I hope he has to go to jail forever,” said Sheila Ennis, 63, of Manhattan Beach, Calif. “I hope they get all his assets, and I do feel others were involved. But now it’s a question of how we fix things for ourselves.”

Not unlike losing a loved one, victims of crime also need closure. That closure is only possible when every individual involved in the crime pays!! A financial settlement with Ruth Madoff should not preclude a potential indictment of her or her sons. Others directly and indirectly involved in this fraud also need to be fully investigated. To do otherwise would be a miscarriage of justice. If those investigations were to cross into government offices, then so be it, because justice neglected is justice denied!

Make no mistake, the fact that Madoff received the maximum allowable sentence is also an indictment of the SEC. Why? The fact that the Madoff Ponzi scheme grew as large as it did was simply a function of the culpability of the SEC. All those at the SEC who never pursued the Madoff fraud over the years should feel real personal and professional shame today.

As we move forward, I can only hope that our country and all who love it view the Madoff sentencing not only as the beginning of justice for the Madoff victims, but also the beginning of real transparency for victims of all financial frauds.

As I write this, though, I am reminded of the thousands of investors and tens of billions of dollars still frozen in Auction-Rate Securities. Those investors have neither restitution, nor justice, nor real media or judicial investigations truly working for them.

As a nation, we have a long way to go to regain our moral stature and promote our markets as being free and open for all.

Are we so focused on the beauty of the rolling surf that we have become blinded by the dangers of the shifting currents? No doubt!! Washington and Wall Street would have it no other way.

My wife and I attended a friend’s wedding on the outer part of Cape Cod this weekend. We had a few hours between the church service and reception. While enjoying a refreshment at a local waterside inn, we soaked in the beauty of the seaside setting. Little did I know, but along that very coastline the day before, two substantial homes had literally washed away as their foundations had been totally eroded by shifting tides.

In analogous fashion, haven’t Wall Street and Washington focused investors’ and taxpayers’ attention on short term goals and developments for their own profit while the public is stuck with an ever increasing bill? Sense on Cents strongly believes this to be true. The media is compliant in allowing the financial and political machines to define the ‘game’ and the ‘rules.’

The mission of Sense on Cents in navigating the economic landscape is to redefine the ‘game’ and the ‘rules’ so people can truly enjoy the beauty of the waves while fully appreciating the dangers of the shifting currents.

At this point, Wall Street is looking to return to ‘business as usual.’ Meanwhile, the programs and policies of the Obama administration are not only going with the ‘current’ that severely damaged our economic foundation, but are also strengthening that current. What do I mean?

Recall that after the market crash of 1929, the two driving forces that pushed our economy and country into The Great Depression were higher taxes and increased protectionism.

While Obama campaigned on targeted tax increases for the highest income earners, there is no doubt in my mind that our entire economy will be hit with higher taxes. These tax increases will come via formal tax legislation and also via increased costs passed along by industries impacted by new legislation.

The formal tax increases for every wage earner in our country paying taxes will result from anemic economic growth. Obama as much admitted last week in a Bloomberg interview that higher taxes across the board may be a necessity. I highlighted this prospect in writing, “The Taxman Cometh”.

Jack Welch stated the other day, “we’re going to have huge tax increases” given the enormous spending programs being launched by the Obama administration, in conjunction with little to no economic growth.

Over the weekend, I read 15 state insurance funds which pay unemployment benefits are now empty. How will these states address this issue? First stop, Washington. Second stop, higher taxes. (more…)

I had a very enjoyable weekend away with family and friends attending a wedding. As such, needed to take the week off from the radio show. Don’t fear, though: No Quarter Radio’s Sense on Cents with Larry Doyle will be back ‘on the air’ next Sunday evening, July 5th.

Sense on Cents will be back navigating the economic landscape tomorrow morning.

I will provide a more thorough review of this report within the next 48 hours but I want to quickly provide some commentary on Finra’s assessment of their own involvement with Auction-Rate Securities.

1. They provide NO details on the liquidation of their own $647 million ARS position in Spring 2007. No surprise there but given that the U.S. attorney in Brooklyn and the SEC are investigating executives from Lehman Bros. for potentially front-running the market in liquidating ARS in the same time period, I believe this issue remains unresolved.

2. In my opinion, Finra’s review of their own handling of developments within the ARS market is akin to “the best defense is a good offense.” How so? Finra is touting a successful return of +/-1% of investor capital as a ‘flag waving’ event. WOW!!

Finra has been involved with 9 settlements totaling a return of $1.2billion dollars. Meanwhile thousands of investors with tens of billions of dollars remain frozen. Wall Street professionals involved in the ARS market have shared with me that as much as $170 billion in funds remain frozen. If that number is accurate, Finra’s “success” amounts to a batting average of .7 of 1%. If that is success, then the bar is obviously being held exceptionally low.

Dozens of ARS investors have contacted me to share their frustration in attempting to engage Finra.

3. Finra’s investment returns within their own internal portfolio were -26%. No details provided on which hedge funds or fund of funds.

As indicated previously, I will more thoroughly review the report within the next few days. On first blush I see no material increase in transparency necessary to inspire increased investor confidence.

Summer Friday afternoons on Wall Street trading desks were always entertaining propositions. Traders were figuring out who would cut out early. The jokes would fly. The older folks on the desk would welcome hearing the Thursday evening escapades of the younger crowd. Invariably, somebody would say, “have you heard the one about….”

In that spirit, hat tip to RO for providing this quick overview of the current state of the U.S. economy. Funny how this snapshot is very much akin to the ‘shell game’ analogy often used here at Sense on Cents.

Enjoy!!

It is a slow day in the East Texas town of Madisonville.

It is raining, and the little town looks totally deserted.

Times are tough, everybody is in debt and everybody lives on credit.

On this particular day a rich tourist from the East is driving through town.

He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.

As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to pay his debt to the pig farmer.

The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.

The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her “services” on credit.

The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor, paying for the rooms that she had rented when she brought clients to that establishment.

The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.

At that moment the traveler from the East walks back down the stairs, after inspecting the rooms.

He picks up the $100 bill and states that the rooms are not satisfactory . . . pockets the money and walks out the door and leaves town.

No one earned anything. However, the whole town is now out of debt and looks to the future with a lot of optimism.

That, ladies and gentlemen, is how the United States Government is conducting business today.